Update ACCT 301 Final 12/18

Zagat Inc. is a calendar-year corporation. Its financial statements for the years 2017 and 2016 contained errors as follows: Ending Inventory 2017 $9,000 overstated 2016 $18,000 overstated Depreciation Expense 2017 $6,000 understated 2016 $13,500 overstated Assume that the proper correcting entries were made at December 31, 2016. By how much will 2017 income before taxes be overstated or understated?

$15,000 overstated In 2017, the overstatement of the ending inventory by $9,000 results in an understatement of the cost of goods sold, and thus, an overstatement of the net income, by $9,000. The understatement of depreciation expense by $6,000 overstates net income by $6,000. The combined effect of these two errors would be a total overstatement of the net income of $15,000 ($9,000 + $6,000).

Miles Corporation sold land to South Ridge Inc. for $200,000 cash and a zero interest-bearing note with a face amount of $600,000. The fair value of the land at the date of sale was $690,000. What value should be assigned to the note receivable by South Ridge?

$490000 The land has a fair value of $690,000 so the cash plus note must equal that amount. $690,000 - $200,000 = $490,000

For the month of May 2017, Ceres Corporation, which uses the direct write-off method in accounting for uncollectible accounts receivable, has the following information: Cash sales $40,000 Cash received on accounts receivable 32,000 Accounts receivable, May 1, 2017 $105,000 Accounts receivable, May 31, 2017 $92,000 Accounts receivable written off as uncollectible $2,000 What are the gross sales for May 2017?

$61,000 = 40000+32000-13000+2000 Find the difference between the beginning and ending accounts receivable. $105,000 - $92,000 = $13,000 Subtract this from the cash received on accounts receivable to find the amount of credit sales. $32,000 -$13,000 = $19,000 Add this to the cash sales. $19,000 + $40,000 = $59,000 Adjust for the direct write offs. $59,000 + $2,000 = $61,000

Which of the following statements are true regarding the classification of accounts and notes receivable?

1. Segregation of the different types of receivables is required if they are material. 2. Disclose any loss contingencies that exist on the receivables. 4. Valuation accounts should be appropriately offset against the proper receivable accounts.

Which of the following statements are true regarding uncollectible accounts receivable? (Select all that apply.) 1. The direct write-off method records the bad debt in the year that it is determined that a specific receivable cannot be collected. 2. The allowance method is based on the assumption that the percentage of receivables that will not be collected can be predicted from past experiences, present market conditions, and an analysis of outstanding balances. 3. The direct write-off method will provide for a proper matching of costs with revenues of the period when the average monthly accounts receivable balance is consistent throughout the year. 4. An uncollectible account receivable is a loss of revenue that requires, through proper entry in the accounts, a decrease in the asset accounts receivable and a related decrease in income and stockholders' equity.

1. The direct write-off method records the bad debt in the year that it is determined that a specific receivable cannot be collected. 2. The allowance method is based on the assumption that the percentage of receivables that will not be collected can be predicted from past experiences, present market conditions, and an analysis of outstanding balances. 4. An uncollectible account receivable is a loss of revenue that requires, through proper entry in the accounts, a decrease in the asset accounts receivable and a related decrease in income and stockholders' equity.

Q 8.17: The Brighton Corporation included the following information in their inventory account at December 31, 2017: goods held on consignment by Brighton $7,000 Merchandise out on consignment, at sales price, including 30% mark-up on selling price $12,000 Goods purchased, in transit, shipped f.o.b. shipping point $9,000 How much should Brighton's inventory be reduced at December 31, 2017?

10600= reduced by $7000 and $3600 (12000*30%) from the $12,000 merchandise out on consignment with 30% mark-up on selling price. pg934

Gandalf & Sons receives a 5-year, $20,000 zero interest-bearing note, the present value of which is $11,348.60. What is the implicit interest rate that equates the total cash to be received to the present value of the future cash flows?

12% $20,000/$11348.6 = 1.7623 Raise 1.7623 to the power of 1/the number of periods and then subtract 1. 1.7623(1/5) - 1 = 11.999

Which of the following conditions are required if the transfer of receivables with recourse is to be accounted for as a sale?

2. The transferor surrenders control of the future economic benefits of the receivables. 3. The transferee cannot require the transferor to repurchase the receivables. 4. The transferor's obligation under the recourse provisions can be reasonably estimated.

Paid $6,450 on August 31 for 5 months' rent in advance. Adjust for Dec

5 months in advance( ignore August) 4/5 x 6450

Q 8.13: The Tital Company adopts dollar-value LIFO inventory on 12/31/16 when its inventory at current price is $45,000. The inventory value on 12/31/17 at current 2017 prices is $65,000. If prices increased by 30% during 2017, the dollar-value LIFO inventory at 12/31/17 will be

51500= 65000/45000=144% 65000/130%=50000 50000-45000=5000 45000/50000=0.9% rounded up 10% increase 5000*130%=6500 45000-6500=51500

A business whose inventory consists of similar items would be most likely to use which of the following cost flow assumptions?

AVERAGE

Under a perpetual inventory system which accounts should be debited the each time a sale on account is made?

Accounts Receivable and Cost of Goods Sold. When a sale on account is made under a perpetual inventory system, Accounts Receivable, not Inventory, is debited for the selling price of the goods and Cost of Goods Sold is debited for the cost of the goods.

What is one difference between a trading security and a held-to-maturity security?

An equity security can be classified as a trading security but not as a held-to-maturity security.

Identifiable asset

Arises from a contractual or legal right, or if it is separable.

How should Trinitron Inc. report an IOU from Julius Corporation?

As a receivable

Hat Trick Manufacturing sold equipment to Puck & Co., taking in exchange a zero interest bearing note. The equipment had a fair market value of $36,000 and the face amount of the note was $40,000. How should Hat Trick Manufacturing present the note in a balance sheet prepared immediately after receipt of the note?

At face amount less implicit interest.

Which of the following events will appear in the cash flows from financing activities section of the statement of cash flows? a. Cash purchases of equipment. b. Cash purchases of bonds issued by another company. c. Cash received as repayment for funds loaned. d. Cash purchase of treasury stock.

Cash purchase of treasury stock

Interest incurred while getting inventories ready for sale is a product cost.

FALSE Interest is an indirect cost of financing and is thus treated as a period cost, not a product cost.

LIFO liquidation can distort net income, but generally results in substantial tax savings.

FALSE LIFO liquidation distorts net income and can result in substantial additional taxes, not substantial tax savings.

Merchandising concerns report the cost assigned to unsold units left on hand as finished goods inventory.

FALSE Merchandising firms call their unsold units Merchandise Inventory.

The Allowance to Reduce Inventory to LIFO account is reported on the income statement in the Other Expenses and Losses section.

FALSE The Allowance to Reduce Inventory account should be reported on the balance sheet in the Current Assets section as a deduction from Inventory.

The ending inventory and cost of goods sold will be the same whether a perpetual or periodic system is used under the:

FIFO method.

Q 8.7: Which of the following is true of the purchase of inventory items on account using the perpetual inventory method?

It has no effect on working capital but probably changes the current ratio.

Which of the following statements is not true as it relates to the dollar-value LIFO inventory method?

It is easier to erode LIFO layers using dollar-value LIFO techniques than it is with specific goods pooled LIFO.

Q 8.12: Which of the following statements is not true about the dollar-value LIFO inventory method?

It is easier to erode LIFO layers using dollar-value LIFO techniques than it is with specific goods pooled LIFO. pg405

In addition to being a short-term, highly liquid investment that is readily convertible into known amounts of cash, which of the following is also true of cash equivalents?

It is likely they will be recorded as temporary investments in the future.

Q 8.6: Which of the following is true of the use of LIFO under a perpetual inventory system (units and costs)?

It may yield a higher inventory valuation than LIFO under a periodic inventory system when prices are steadily rising.

What is the expected result of an accounts receivable that the company expects to collect in 10 months?

It would be classified as a current receivable because the current year or operating cycle includes the next 10 months.

Q 8.26: The Yorland Company has been using the LIFO method of inventory valuation for 10 years, since it began operations. Its 2017 ending inventory was $60,000, but it would have been $85,000 if FIFO had been used. If FIFO had been used, which of the following would be true about Yorland's income before income taxes?

It would have been $25,000 greater over the 10-year period. pg415

Purchased a 1-year insurance policy on June 1 for $1,080 cash. Adjust end of year

June is included 7/12 x 1080

Q 8.9: Which of the following is the correct formula to determine FIFO inventory?

LIFO inventory + LIFO reserve

Which of the following would not be included in a manufacturing company's balance sheet?

Merchandise inventory. Merchandise inventory would not be included in a manufacturer's balance sheet. Finished goods inventory, Raw materials inventory and Work-in-process inventory are all included in a manufacturer's balance sheet.

What is the expected result if Northern Pine Company pays $16,750 for a zero-interest-bearing, three-year note with a face value of $20,000?

Northern Pine can determine the yearly interest by amortizing the difference between the future value and the present value over the life of the note.

Which of the following accounts does not exist in a perpetual inventory system?

Purchases. Sales Returns and Allowances account exists in a perpetual inventory system. The Purchases account exists only in a periodic inventory system, not a perpetual inventory system.

When goods are shipped f.o.b. shipping point, title passes to the buyer when the seller delivers the goods to a common carrier.

TRUE For goods shipped f.o.b. shipping point, title passes to the buyer when the seller delivers the goods to a common carrier.

A sale with a "repurchase" agreement allows the seller to finance their inventory and retain the risks of ownership even though the technical title has been transferred.

TRUE The sale with repurchase agreement is a sales arrangement that includes an agreement to repurchase the goods at a specified price over a specified period of time.

Why is the allowance method preferable to the direct write-off method?

The allowance method recognizes the expense of a bad debt in the same period as the sale.

Q 8.2: Which of the following does not need to be determined in order to find the valuation of inventories?

The cost of goods held on consignment from other companies.

Why do companies often use the gross method of recording cash discounts if the net method is theoretically more correct?

The gross method requires less bookkeeping.

As it relates to selling receivables, recourse is defined as:

The obligation of the seller of the receivables to pay the purchaser in case the debtor fails to pay.

Which of the following is most like the SEC definition for a compensating balance?

The portion of any demand deposit, time deposit, or certificate of deposit maintained by a corporation which constitutes support for existing borrowing arrangements of the corporation with the lending institution

Q 8.4: Which of the following is implied by the use of a Purchase Discounts Lost account?

The recorded cost of a purchased inventory item is its invoice price less the purchase discount allowable, whether or not taken.

Unitex sold its accounts receivable outright to Hyperion Enterprises which is a financing company that normally buys accounts receivable of other companies without recourse. What has happened to the accounts receivable?

They have been factored.

Q 8.27: Which of the following is true of goods in transit which are shipped f.o.b. shipping point?

They should be included in the inventory of the buyer. pg393

During 2010 the DLD Company had a net income of $50,000. In addition, selected accounts showed the following changes: Accounts Receivable $3,000 increase Accounts Payable 1,000 increase Building 4,000 decrease Depreciation Expense 1,500 increase Bonds Payable 8,000 increase What was the amount of cash provided by operating activities? a. $49,500 b. $50,000 c. $51,500 d. $59,500

a

In a statement of cash flows, interest payments to lenders and other creditors should be classified as cash outflows for a. operating activities. b. borrowing activities. c. lending activities. d. financing activities.

a

In preparing a statement of cash flows, which of the following transactions would be considered an investing activity? a. Sale of equipment at book value b. Sale of merchandise on credit c. Declaration of a cash dividend d. Issuance of bonds payable at a discount

a

When a customer purchases merchandise inventory from a business organization, the customer may be given a discount which is designed to induce prompt payment. What is the term for this type of discount?

a cash discount

Q 8.10: Which of the following is a likely result of LIFO liquidation?

a higher tax bill pg412

Which phrases fill in the following blanks? Orion Industries calculated the ________ to assess how successful they were at collecting outstanding receivables and the ________ to assess the effectiveness of their credit and collection policies.

accounts receivable turnover; days outstanding

Q 8.20: Which of the following demonstrates the results of failure to record a purchase of merchandise on account even though the goods are properly included in the physical inventory? Assume the periodic method is used.

an understatement of liabilities and an overstatement of owners' equity pg417

Accounts receivable from officers, employees, or affiliated companies should be presented on the balance sheet

as assets but separately from other receivables.

Q 8.5: Of the following, the interest costs that should be capitalized would be the

assets constructed for internal use = yes assets produced as a discrete projects for sale or lease = yes

Which of the following is the denominator when determining the current cash debt coverage ratio?

average current liabilities

In a statement of cash flows, payments to acquire debt instruments of other entities (other than cash equivalents) should be classified as cash outflows for a. operating activities. b. investing activities. c. financing activities. d. lending activities.

b

Q 8.33: When paying suppliers promptly, the cash discounts received can be recorded using

both the net method and the gross method. pg396

Harding Corporation reports the following information: Net income $500,000 Depreciation expense 140,000 Increase in accounts receivable 60,000 Harding should report cash provided by operating activities of a. $300,000. b. $420,000. c. $580,000. d. $700,000.

c

In a statement of cash flows, receipts from sales of property, plant, and equipment and other productive assets should generally be classified as cash inflows from a. operating activities. b. financing activities. c. investing activities. d. selling activities.

c

In preparing a statement of cash flows, cash flows from operating activities a. are always equal to accrual accounting income. b. are calculated as the difference between revenues and expenses. c. can be calculated by appropriately adding to or deducting from net income those items in the income statement that do not affect cash. d. can be calculated by appropriately adding to or deducting from net income those items in the income statement that do affect cash.

c

Sauder Corporation reports the following information: Net income $250,000 Depreciation expense 70,000 Increase in accounts receivable 30,000 Sauder should report cash provided by operating activities of a. $150,000. b. $210,000. c. $290,000. d. $350,000.

c

If inventory levels are stable or increasing, an argument which is not an advantage of the LIFO method as compared to FIFO is

cost assignments typically parallel the physical flow of goods.

Which of the following is used to show a direct relationship between an asset and a liability on the balance sheet?

cross reference

If common stock was issued to acquire an $8,000 machine, how would the transaction appear on the statement of cash flows? a. It would depend on whether you are using the direct or the indirect method. b. It would be a positive $8,000 in the financing section and a negative $8,000 in the investing section. c. It would be a negative $8,000 in the financing section and a positive $8,000 in the investing section. d. It would not appear on the statement of cash flows but rather on a schedule of noncash investing and financing activities.

d

In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash inflows from a. lending activities. b. operating activities. c. investing activities. d. financing activities.

d

Preparing the statement of cash flows involves all of the following except determining the a. cash provided by operations. b. cash provided by or used in investing and financing activities. c. change in cash during the period. d. cash collections from customers during the period.

d

Which of the following accounts is classified as a short-term liability? a) most pension obligations b) long-term liabilities that mature within the operating cycle and will be paid from a sinking fund. c) obligations payable at some date beyond the operating cycle. d) income taxes payable.

d) income taxes payable

Q 8.16: Which of the following is not a sales situation in which specific identification is traditional?

department stores pg398

The approach employed by most companies that currently use the LIFO method is:

dollar-value LIFO.

Q 8.22: Which of the following is true when the beginning inventory is overstated?

ending retained earnings is not affected pg416

Q 8.8: Why is the traditional LIFO approach which tends to emphasize specific goods in costing LIFO inventories often unrealistic?

erosion of the LIFO inventory can easily occur which often leads to distortions of net income and large tax payments

Q 8.18: Which of the following shows when the goods in transit at the balance sheet date should be included in the purchaser's inventory?

f.o.b shipping point pg393

Q 8.31: The title passes to the buyer when the supplier delivers goods to the common carrier in cases when a supplier ships goods f.o.b destination.

false pg393

In preparing a statement of cash flows, sale of treasury stock at an amount greater than cost would be classified as a(n) a. operating activity. b. financing activity. c. extraordinary activity. d. investing activity.

financing activities

Q 8.15: The acquisition cost of a heavily used raw material changes frequently. The inventory amount of this material at year end will be the same if perpetual records (units and costs) are kept as it would be under a periodic inventory method only if the inventory amount is computed under which of the following methods?

first-in, first-out method pg400

All of the following are major disadvantages of using LIFO, except:

future earnings will not be affected substantially by future price declines.

Q 8.11: Which of the following explains why the dollar-value inventory method is an improvement over the traditional LIFO pool approach?

increases and decreases in a pool are determined and measured in terms of total dollar value rather than the physical quantity of the goods in the inventory pool pg405

Q 8.21: The Ronan Corporation uses the perpetual inventory method. On May 1, it purchased $60,000 of inventory, with terms 2/10, n/30. On May 3, $6,000 were returned by the Ronan Corporation. The supplier was paid by Ronan on May 9. Which of the following should be credited by Ronan on May 9?

inventory for $1,080 pg390

FBS Corporation uses the perpetual inventory method and the gross method for recording purchases on account. On May 11, it purchased $44,000 of inventory, terms 2/10, n/30. On May 13, FBS returned goods that cost $4,000. On May 19, FBS paid the supplier. On May 19, the company should credit

inventory for $800. May 19 would include a debit to Accounts Payable, $40,000 and credits to Inventory, $800, and Cash, $39,200 ($40,000 - $800).

Making and collecting loans and disposing of property, plant, and equipment are a. operating activities. b. investing activities. c. financing activities. d. liquidity activities.

investing activities

revenue test

its reported revenues are 10% or more of the combined revenues of all the company's operating segments

Q 8.30: ___________ generally have three different inventory accounts, including Raw Materials, Finished Goods, and Work-in-Process.

manufacturers pg388

Q 8.1: Which of the following is not a type of inventory for a manufacturing company?

merchandise inventory

Q 8.24: A store has a number of items left over that have not been sold. The cost of these unsold items will be reported as ___________ inventory.

merchandise inventory pg388

Q 8.23: If a company is working with perpetual inventory records to compute average cost, they will likely use the ________ method.

moving-average pg399

Q 8.19: The ending inventory of the Ryan Company is understated in year one by $20,000. This error is not corrected in year one or in year two. The impact this error will have on total net income for years one and two combined will be

no effect on total net income for the two years. pg416

Q 8.25: The beginning inventory for 2016 is overstated. The effects of this error on cost of goods sold for 2016, net income for 2016, and assets at December 31, 2017, respectively, are represented by which of the following options?

overstatement, understatement, no effect pg417-418

Q 8.34: Which of the following represents how freight charges on goods sold are accounted for?

period costs pg396

Freight charges on goods sold are accounted for as:

period costs.

A ____ would be properly classified as cash.

savings account

Q 8.3: Which of the following costs are not inventoriable?

selling costs of a sales department

operating profit (loss) test

split profit and losses up

Q 8.28: Which of the following would not appear in a Supplies Inventory account?

steel to make a product

Q 8.32: The specific identification method may be considered ideal for assigning costs to inventory and cost of goods sold, because

the cost flow matches the physical flow. pg398

Q 8.29: The impact on the current ratio of including goods in transit f.o.b. shipping point in Mobile Company's purchases, but not ending inventory when Mobile uses the periodic inventory system is that

the current ratio will be understated. pg416-417

T/F? Free cash flow is a more sophisticated way to examine a company's financial flexibility.

true

What is the net change in the fair value of a receivable from one period to another, exclusive of interest revenue?

unrealized holding gain or loss

Atlantic Company had 500 units of "CL-10" in its inventory at a cost of $12 each. It purchased 300 more units of "CL-10", for $8,400. Atlantic then sold 400 units of "CL-10 at a selling price of $30 each, resulting in a gross profit of $4,800. The cost flow assumption used by Atlantic is

weighted average. Costs of $6,000 (500 units x $12) for the first 500 "CL-10" units plus $8,400 for the second 300 "CL-10" units equals total cost of goods available for sale of $14,400 for 800 "CL-10" units. Dividing the total cost of goods available ($14.400) for sale by the total units available for sale (800) results in $18 each as a weighted average cost per unit; 400 units X $18 = $7,200 cost of goods sold; Revenues, $12,000 - Cost of goods sold, $7,200 = $4,800 gross profit.

Which of the following describes a similarity between an income statement and a statement of cash flows?

Both statements summarize activities that took place during an accounting period.

How is the accounts receivable turnover ratio computed?

By dividing net sales by average net receivables